After a major sell-off, precious metals are a cheap buy for long-term investors, according to Wells Fargo (NYSE:WFC) Investment Institute, which highlighted silver as the best investment choice at the moment.
“At the top of our commodity buy list are metals, especially precious metals. Silver looks to be the best buy,” Wells Fargo Real Asset Strategy head John LaForge said in a note to clients.
Spot silver tumbled down 10.6% in the last six months, last trading at $14.78, up 0.14% on the day, while September Comex silver was last seen at $14.76, down 0.01% on the day.
“Silver is down … and has a good fundamental backdrop … For long-term investors, accumulating silver in the $13-$14 range, looks like a ‘good deal,’ in our view,” LaForge said last week.
Wells Fargo is of the view that the US dollar rally, which has been weighing heavily on all precious metals, will subside by the end of the year, lending the much needed helping hand to the struggling metals.
“We should note that Wells Fargo Investment Institute (WFII) believes the dollar’s strength likely will fade into year-end,” LaForge wrote. “This matters because commodity prices tend to move opposite the US dollar, primarily because most commodities are priced globally in US dollars … We anticipate these developments should help commodity prices to bounce.”
The US dollar has been partly driven by the escalation of trade tensions between the U.S. and China this summer, Wells Fargo pointed out. But, the institute also noted that the fears of the US dollar strength making precious metals more expensive and weighing heavily on future demand are taken out of proportion.
“A strong US dollar often makes commodity purchases more expensive for a country that has its own currency. If the dollar strengthens too much, the result can be fewer commodity purchases,” LaForge explained. “Commodity markets appear to be worried about such a demand slowdown, particularly from the massive commodity importer, China. Investors already were worried about slowing Chinese growth, but WFII believes that those fears may be overblown.” – Anna Golubova
The Turkish lira has seen its value drop an astonishing 40% since the beginning of the year. The Argentine peso, the Brazilian real and the Russian ruble are the other victims of the emerging markets thrashing that continues to unfold.
As investors have fled the emerging markets and sought the safety of the US dollar and U.S. equities, they have continued to increase their short positions in commodities. Most surprisingly, and counterintuitively, bets against precious metals (gold, silver and platinum) have reached record levels.
The People’s Bank of China (PBOC) has kept a close eye on the emerging markets currency carnage. After seeing its yuan decline by more than 8% since April 2018, the PBOC reacted by imposing a stiff 20% reserve requirement on forward currency contracts. With the PBOC making it more difficult to short the yuan, and with the inverse correlation between gold and the yuan sitting at a five-year high, we wonder if traders are using gold as a proxy for shorting the yuan? Other astute investment managers have suggested this dynamic as well.
Figure 1: Correlation Between Chinese Yuan and Gold at Five-Year High (2013-2018). Source: Bloomberg. XAU, the ISO 4217 standard code for one troy ounce of gold, versus Chinese Yuan (CNY), as of August 20, 2018.
YTD GOLD SHORTS UP 275%, SILVER SHORTS UP 84%
Net speculative positioning in gold has declined significantly, currently at a 15-year low. Net positioning in silver has recovered slightly from a 10-year low set in April 2018. With investor’s sentiment at depressed levels, the short positioning in both silver and gold is catching our eye.
If past is prologue, the current shorting frenzy in gold and silver futures will likely be followed by an intense short-covering rally.
Short positions in gold are up 275% year to date. Investors are now short just over 215k contracts of gold or nearly 21.5 million ounces of gold. Short positions in gold have overwhelmed longs, whereby the net positioning in gold is now -3,688 contracts. The last time we saw a number this low and this negative was in 2001 when gold traded below $300/oz.
Figure 2: Speculative Gold Futures Shorts on CFTC Have Reached All-Time Highs(2008-2018). Source: Bloomberg. CFTC CEI Gold Non-Commercial Short Contracts/Futures Only as of August 20, 2018.
We have seen gold and silver do well following previous spikes in short interest. With over US$25 billion of gold being shorted, any meaningful short covering should produce a significant price appreciation in gold.
Figure 3: The Current Opportunity: Inverse Relationship between Spot Gold and Gold Futures Shorts (2013-2018). Source: Bloomberg. XAU, the ISO 4217 standard code for one troy ounce of gold, versus the CFTC CEI Gold Non-Commercial Short Contracts/Futures Only as of August 20, 2018
SILVER FUTURE SHORTS: A DANGEROUS GAME?
Interestingly, silver shorts are also at record highs at the time of this writing, up nearly 84% year to date. The latest data indicates that investors are short over 96,000 contracts of silver, representing almost 480 million ounces. This number is astounding to us for many reasons. With 852 million ounces of silver mined in 2017, 480 million ounces represent over 56% of 2017 annual silver production. Out of 852 million ounces, 209 million ounces ended up in silver jewelry and 657 million ounces were used in industrial fabrication including silverware. These two uses of silver alone represent 866 million ounces, according to The Silver Institute: World Silver Survey 2018 and are larger than the annual mined supply. The gap in supply and demand is met by silver scrap.
Suffice it to say that silver supply is tight. There are no mines scheduled to come on in the next year or two which would increase annual silver output by anything close to 450 million ounces. Unless an asteroid carrying half a billion ounces of silver lands on earth, we believe the shorts are playing a dangerous game with little to gain.
Silver Futures Shorts at All-Time Highs (2008-2018). Source: Bloomberg. CFTC CEI Silver Non-Commercial Short Contracts/Futures Only as of August 20, 2018.
AN EXTRAORDINARY OPPORTUNITY FOR CONTRARIANS
The bonfire of currencies has succeeded in distracting investors away from more important topics that underpin our bullish thesis on gold, namely, the escalating global trade war, rising geopolitical tensions and spiraling debt and budget deficits in the United States. Bearish sentiment towards precious metals has reached a climactic phase. If past is prologue, the current shorting frenzy in gold and silver futures will likely be followed by an intense short-covering rally. – Shree Kargutkar
The movement of precious metal prices has little correlation to the stock market. That’s why even though the Canadian stock market, represented by S&P/TSX Composite Index, or TSX index for short, is trading at near its all-time high, the gold and silver ETFs have fallen about 9% and 13% year to date.
Since precious metal prices move differently from the TSX index, investors can consider precious metal stocks as a hedge for their portfolios.
Silver prices tend to be more volatile than gold prices, and that’s where the investment opportunity lies. In other words, when precious metal prices recover to higher grounds from the recent dip, the price of silver will have a bigger movement — percentage-wise — over the price of gold, and so will silver-focused stocks versus gold-focused stocks.
Here are a couple of silver stock ideas that have become more attractive due to the recent dip in silver prices.
Pan American Silver (TSX:PAAS)(NASDAQ:PAAS) is a mid-cap miner that primarily produces silver but also sells by-products including gold, zinc, lead, and copper.
In the first half of 2018, Pan American Silver produced about 12.4 million ounces of silver, 99.6 thousand ounces of gold, 29.6 thousand tonnes of zinc, 10.4 thousand tonnes of lead, and 4.9 thousand tonnes of copper.
The company is on track to produce 25-26.5 million of silver this year. Management also estimates Pan American Silver will produce the same levels of gold, lead, and zinc as last year.
Pan American Silver’s operations are diversified across six silver mines in North and South America. It also has six development projects in these regions. So, Pan American Silver has the best long-term growth profile among its peers. What’s more to like is that it also commands an above-average recent net margin of about 17.9%.
WPM data by YCharts – PAAS and WPM have little correlation to the TSX index
Wheaton Precious Metals (TSX:WPM)(NYSE:WPM) is one of the best silver stocks to own. The recent roughly 19% dip from its high is an excellent opportunity to begin buying.
Wheaton Precious Metals is a precious metal streaming company. In other words, it doesn’t run any mines, but instead pays an upfront cost to its mining partners around the world for future streams in their by-product silver or gold typically from the partners’ lead, zinc, or copper mines.
The result for investors is a rare opportunity to invest in low-risk Wheaton Precious Metals, which has leverage to increases in silver or gold prices as well as growth via new stream agreements.
Just in July, Wheaton Precious Metals closed the gold and palladium streaming agreement with Sibanye-Stillwater, one of the world’s top gold producers. Altogether, Wheaton Precious Metals currently has streaming agreements with 20 operating mines.
With Wheaton Precious Metals’s low-risk business model, it’s no wonder its recent net margin of 36.5% beats the rest in the precious metals sector.
If you believe that silver prices will eventually turn around, now, on the dip, is a fantastic opportunity to invest in Pan American Silver or Wheaton Precious Metals. Both stocks have little correlation to the TSX index. Therefore, they are a great way to hedge your portfolio.
Add a Comment
Are you sure you want to block %USER_NAME%?
By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.
%USER_NAME% was successfully added to your Block List
Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.